Austerity’s Big Fail

Repeatedly one hears the cry in Washington that the federal debt is dangerously high. Spending has to be drastically cut. Seldom is it discussed how the debt got to be so high in the first place (30 years of profligate spending by Republican administrations – with no complaints from the Republican Party itself).

Suddenly, once a Democrat became President, the refrain became: stop the spending. Cut entitlements and social programs. Cut, cut, and cut again. Austerity, not increased spending, is the solution to America’s economic problems.

This weekend I came across an excellent article in the current issue of Foreign Affairs entitled “The Austerity Delusion: Why a Bad Idea Won Over the West.” It is written by Mark Blyth, a professor of international political economy at Brown University, who is also the author of the recent book, Austerity: The History of a Dangerous Idea (Oxford Press, 2013). The article is adapted from material in that book.

Blyth begins his essay stating,

The Eurozone countries, the United Kingdom, and the Baltic states have volunteered as subjects in a grand experiment that aims to find out if it is possible for an economically stagnant country to cut its way to prosperity.

The results of the experiment are now in, and they are equally consistent: austerity doesn’t work.

Austerity measures were applied in these countries to decrease the ratio of debt to GDP. If government debt is cut through decrease spending and GDP remains constant, the debt-to-GDP ratio is lowered. However, austerity measures have instead cut consumer spending, which has cut demand and slowed production. This has lowered the GDP at an even faster rate than government debt. The result:

Portugal’s debt-to-GDP ratio increased from 62 percent in 2006 to 108 percent in 2012. Ireland’s more than quadrupled, from 24.8 percent in 2007 to 106.4 percent in 2012. Greece’s debt-to-GDP ratio climbed from 106 percent in 2007 to 170 percent in 2012. [Even] Latvia’s debt rose from 10.7 percent of GDP in 2007 to 42 percent in 2012.

In addition, he says,

None of these statistics even begin to factor in the social costs of austerity, which include unemployment levels not seen since the 1930s in the countries that now make up the Eurozone.

Why Austerity Doesn’t Work

Blyth explains that the drive for austerity is particularly seductive because of the common sense nature of its core claim: you can’t cure debt with more debt. And while this is true in principle, it oversimplifies the actual situation.

Blyth maintains that austerity fails forthree reasons that are also rooted in common sense truths but often fail to be noticed.

First is that austerity impacts some more than others. Those in the top income brackets can comfortably absorb the effects of austerity and still have money to spare. Meanwhile, those at the bottom have little to no reserves to cushion the blow and experience the greatest pain. In a society in which the 400 richest Americans own more assets than the poorest 150 million, he says,

trying to get the lower end of the income distribution to pay the price of austerity through cuts in public spending is both cruel and mathematically difficult.

The poor simply do not have the resources to carry this burden.

Second, austerity fails because in an interconnected global economy

if all states … cut their spending simultaneously, the result can only be a contraction of the regional economy as a whole.

Ultimately, economic growth (increased profits) is the only effective way out of debt. But someone must be buying goods and services for profits to be made. If there are fewer buyers in the market place, there is less profit to be had. It is as simple as that. Austerity fails to promote growth.

The third reason austerity fails is that

the notion that slashing government spending boosts investor confidence does not stand up to scrutiny.

One of the main arguments given for austerity is that high government debt creates market uncertainty, and that strict austerity to curb that debt it is necessary for restoring business confidence. It is believed that once austerity measures have been implemented, both consumers and producers will begin to “feel confident about the future and will spend more, allowing the economy to grow again.”

Blyth maintains that such a belief is more indicative of wishful thinking than actual fact. He asks whether it is realistic to expect that “this behavior will actually be exhibited by financially illiterate, real-world consumers who are terrified of losing their jobs in the midst of a policy-induced recession.”

Lessons to be Learned

Blyth gives a great deal of attention in his article to earlier attempts at using austerity to curb excessive debt in the late 1920s and 1930s. At that time, he says, the United States, the United Kingdom, Germany, and Japan all tried to simultaneously cut their way to growth. This project didn’t just fail; it gave created such economic hardship and disparity that it gave rise to fascism in Europe and Japan and helped cause World War II.

The lessons from the last major attempt at austerity were stark:

When the world’s four largest economies all tried to cut their way to prosperity at the same time in the interwar years, the result was contraction, protectionism, violence, and fascism.

Surely we would want to avoid a similar outcome.

So if austerity is not the solution, what is? Again the author calls for a common sense approach. Excessive debt must be conquered, he says, but countries should not attempt to shed both massive private debt and massive public debt at the same time. Instead,

governments should get the private sector to pay down its debts while maintaining public spending. … Once that is done, as the private sector recovers, tax revenues will increase, and the accumulated debts and deficits can be paid down.

The private sector can effectively be put on the path to recovery through government incentives, such as job creation. “Now would be a good time for Washington to make useful investments” in the public sector, he says. For example,

around a third of the bridges in the United States are badly in need of repair. Fixing them would enhance U.S. productivity and has no downside.

If, on the other hand, the United States were to proceed down the path to austerity there were be a severe downside:

[Under austerity] roads would go unrepaired, students would miss out on gaining knowledge, and the skills of the unemployed would atrophy. … The United States would end up poorer and more debt-ridden than before, and what is most problematic, it would lack the capacities needed to generate future growth.

But, he says in conclusion, you don’t have to take his word for it. Just ask the Europeans how austerity has been working out for them.

About politspectatorEdward Clayton grew up in the US but has lived in Canada for the last 4 decades. He is a long time peace activist and committed to issues of social justice and good government. He reports on Canadian, American, and global politics from a Canadian perspective.

Edward Clayton grew up in the US but has lived in Canada for the last 4 decades. He is a long time peace activist and committed to issues of social justice and good government. He reports on Canadian, American, and global politics from a Canadian perspective.